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Singapore economy to continue on expansion path after growth in 'fits and starts'

Amala Balakrishner
Amala Balakrishner10/28/2021 07:23 PM GMT+08  • 9 min read
Singapore economy to continue on expansion path after growth in 'fits and starts'
A pick up in the domestic and regional economy should benefit the banks and insurance segments, says MAS.
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After experiencing growth in “fits and starts” since the beginning of the year, Singapore can look forward to finishing 2021 with its economy continuing on the expansion path. With output having returned to pre-pandemic levels in 3Q2021, the Monetary Authority of Singapore (MAS) estimates the Republic’s gross domestic product (GDP) will come in at 6% to 7%, or the upper end of its official forecast range for this year.

If the momentum continues through 2022, the central bank estimates that growth will be “slower, but still above trend pace”, barring downside risks from global economic developments and further mutations of the Covid-19 virus.

The optimism in Singapore’s economy stems from its strategy of treating the virus as endemic and the planned gradual relaxation of the current movement restrictions in the next few months, the central bank said in its half-yearly macroeconomic review on Oct 28.

While MAS has not put a number to “above trend” growth, private sector economists estimate that the city-state’s economy has expand- ed at an average of 2% to 3% on average in the years before the pandemic hit. Several economists are now looking at a GDP growth rate of 4% to 5% in 2022.

Maybank Kim Eng economist Chua Hak Bin says this growth depends partly on Singapore’s population and immigration policy. His underlying assumption is of a growth of between 2% to 2.5%. For comparison, MAS forecasts global growth to come in at 5.6% this year before easing to 4.8% in 2022.

Accordingly, Maybank Kim Eng economists Chua and Lee Ju Ye are maintaining their full-year growth forecast for 2021 and 2022 at 6.8% and 3.5%, respectively. “We expect domestic demand to continue improving in the fourth quarter, with the economic reopening and relaxation of border controls,” they say, adding that the tourism and air transport sectors will get relief from the addition of more visitors from Singapore’s vaccinated travel lane agreements.

OCBC Bank’s chief economist Selena Ling — who has also maintained her full-year growth estimate of 6.7% — believes that the nation’s output should return to full potential next year, barring a global resurgence of the virus or a set- back in the pace of re-opening.

In the meantime, DBS senior economist Irvin Seah has raised his 2021 forecast from 6.3% to 6.7%, as he is betting that the high level of vaccination will make for a safe reopening of the economy and allow economic activities — including travel — to further resume.

“Progress in this regard has been encouraging. Barring the risks on the efficacy of existing vaccines being weakened as a result of virus mutations or waning antibody levels, the reopening of the economy is expected to provide renewed impetus to growth over the next 12 months,” says Seah.

Disparate recovery

However, the growth outcomes for different sectors are seemingly disparate. The recovery of consumer-facing industries — food and beverage, retail and land transport — is slated to be “held back” in early 4Q2021 due to the high Covid-19 cases in the community, and the resultant cap on social gatherings to two persons.

While online transactions have been supporting the sector, MAS says that consumer confidence is likely to pick up once the number of infections goes down. “A more extensive reopening of the economy towards the end of this year should improve footfall for retail businesses and eateries,” it adds.

The recovery of the travel-related sector — one of the worst-hit by the pandemic —also appears protracted. “Travel demand is not expected to return quickly or substantially in the near term,” MAS notes. This comes even as Singapore has eased some border restrictions through its Vaccinated Travel Lane (VTL) arrangement that allows quarantine-free travel to countries such as the US, UK, Italy, Netherlands and Brunei.

As of Oct 25, some 7,000 Vaccinated Travel Passes had been issued to short-term visitors, making up less than 1% of monthly visitor arrivals pre-Covid-19. Still, the central bank stresses that a stronger rebound in the sector’s performance may only happen over the course of 2022 when border barriers are removed more substantially.

Recovery of the construction sector — which came in at an all-time low last year — is also slated to be hampered by elevated raw material costs and manpower shortages for the rest of the year.

As such, MAS says the easing of some supply-side constraints should support higher levels of construction activity given the strong pipeline of contracts awarded for projects, beyond 2021. These projects include the construction of major public infrastructure works, public housing projects, healthcare facilities and redevelopment of past en bloc sites.

Meanwhile, the outlook of the manufacturing sector — the driver of Singapore’s economy in the past year — is bright. It is expected to continue growing this year as the upswing in the global technology cycle drives demand for electronics production. With global semiconductor revenue growth forecast to hit 26.9% this year and 8.9% in 2022, based on estimates by business research firm Gartner, there are several opportunities for Singapore to reap.

Going forward, MAS says that a pick up in the domestic and regional economic activity in the upcoming quarters should benefit the banks and insurance segments. “The former should be supported by more credit and fee-based banking services, while the latter is expected to see higher demand for general insurance from firms as they boost operations,” it adds.

New trends and sector ‘outturns’

The information and communications sector is similarly expected to grow amid demand from tech-related capex. Investments have al- ready been trickling in, like the government’s $3.8 billion in info-communications technology (ICT) investments made in June, a 10% increase from a year before. The bulk of the projected spending will go towards improving cloud infrastructure and developing AI (artificial intelligence) applications for the public sector.

With things looking up in Singapore’s economy, the labour market is set to rise in tandem with a pick up in resident and non-resident workers. This spells good news, for the total employment stood at 95% of its pre-Covid-19 level in 2Q2021, with most sectors seeing “outturns”.

Labour market and inflation worries

Amid widening sectoral disparities in labour market outcomes, MAS says the “labour market mismatch likely intensified in recent quarters,” for the economy as a whole.

Heightened alert measures took a greater toll on labour demand for consumer-facing segments such as food and beverage services and retail trade, while sectors such as construction and manufacturing faced labour supply constraints.

Calling the weakness in demand for resident workers in 2Q2021 and 3Q2021 “temporary”, MAS is expecting resident employment to “expand at a firm pace into 2022 [while slowing] from this year as resident labour slack is further absorbed.”

The central bank also notes that a tighter labour market, “some lingering mismatch” and a recovery in business and worker confidence will put upward pressure on wages in sectors such as information and communication, health and social services and financial and insurance services.

“In these sectors, employment and job vacancies have both exceeded pre-Covid levels, suggesting tightening in labour market conditions,” notes MAS. It adds that a further push in wages will also come from government policies aimed at improving the wage outcomes of lower-paid Singaporeans.

The republic also has to deal with a more urgent problem: Inflation. Both core and headline gauges edged up in 3Q2021 following a sharp surge in electricity and gas costs due to the rise in global oil prices to above pre-pandemic levels. Brent crude oil prices rose from US$61 ($82) per barrel in 1Q2021 to US$69 per barrel in 2Q2021, or 9% of the levels it was at in 4Q2019 before the pandemic. Inflation levels were also pushed up by higher prices of imported food.

At this level, OCBC’s Ling notes that the core Consumer Price Index (CPI) has accelerated for the third straight month. “This is the highest core CPI reading since May 2019 (1.3% y-o-y), and underpins the gradual recovery theme in the Singapore economy,” she adds.

MAS, citing rising labour costs and imported prices, expects underlying inflation to strengthen, with the core inflation to average between 0% and 1% this year. Meanwhile, the headline inflation is forecast to come in at 2%.

In contrast, global inflation is projected at 2.6% in 2021 — the highest since 2011 —and is expected to remain elevated at 2.4% in 2022, reflecting a narrowing global output gap. In Singapore, the large negative output gap that opened in 2020 and narrowed significantly in 2021 is expected to become modestly positive in 2022.

In line with this, the central bank tightened its monetary policy stance by raising “slightly the slope” of the Singapore Dollar Nominal Effective Exchange Rate (S$NEER) policy band up from a flat or 0% slope previously.

At the same time, the slope of the band — which indicates its rate of appreciation — and mid-point will be left unchanged. With this, the central bank hopes to “ensure price stability over the medium-term while recognising the risks to the economic recovery”.

Cover image: Albert Chua/The Edge Singapore

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